This research paper will begin by defining recession in the context of macroeconomic and thus leading to the analysis of consumption, investment, savings, and balance of payment of the United States of America. Factors that led to recession will also be examined against the situation on the ground. A further illustration will be made on the business cycles and factors for their expansion.
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Considering the position of the US economy and the election of new administration, this research will highlight the policy instrument employed by president Obama to jumpstart the economy. This will entail a thorough examination of expansionary fiscal policy as a stimulus package for the economy. There is also a need to look at its effects on the economy if they offer a positive or negative effect.
This can be defined as a progressive decrease in employment of factors of production in an economy, consequently a reduction in the percentage of growth. To streamline this definition, we can consider the effects of a reduction in a business cycle overtime period of time. The business activity contributes to an increased gross domestic product, employment of factors of production, investment level, incomes of households, and saving level of population. To sum up this definition, recession is a contraction in gross domestic product of a nation by more than 50% and lasts for more than a month (Sullivan, 2003). The recession has the effects of reducing government spending; therefore, to counter this effect, the expansionary policy will be employed.
Reasons for the occurrence of recession
The balance of payment is imported to fewer exports of a particular country. When the value of US currency changes very fast against other currencies around the world, it affects the export of goods and services. Demand for goods and services reduces because of the high price charged. This will result in a shift in trade to other nations like China and countries in Europe.
Military presence in Afghanistan and some parts of Arab countries increased the expenditure of the budget. This was necessitated by terrorist threats to the western countries and the assumption that Iraq was in possession of dangerous chemical weapons. As a signatory of United Nations concessions, the United States had to allocate resources to alleviate the probability of attacks. These resources comprised of both monetary and non-monetary resources, which are efficient if used within a country.
Trade barriers in the form of economic sanctions are not favorable for any economy in the world because it destroys the formation of trade blogs and free flow of goods from area of supply to areas of demand. This issue can also be addressed by examination of countries with comparative advantage. If a barrier is imposed on a country, it means that it cannot export its products, thus creating a production surplus. Most of the countries now are considering trading with fast-developing economies. Other nations have diverted their trading partners from the USA to these fast-growing economies.
This, therefore, means that the output for locally manufactured products cannot find market and consequently yielding less national income (Krugman, 2005). Appreciation of the dollar against other hard currencies has affected exports from sectors that have a comparative advantage. The surplus produced is meant to be exported for the sole purpose of earning foreign exchange and support domestic investment. A long-run effect of low exports and increased imports is the creation of an unfavorable balance of payment deficit where the United States economy cannot find a foreign market for its products while, on the other hand, it has to import (Lahart, 2009).
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As illustrated by Krugman (2005), inflationary factors also have a hand in recession. Progressive increase in prices of most consumer products decreases the demand for producer goods. High prices of oil led to energy crisis and, ultimately, the cost of production in industries. If the cost of production increases, then investors who operate under the profit maximization function will shy away from investing in the costly industry.
The effect of this is low employment level and a minimized foreign direct investment. It is wise to note that inflows to a country contribute to increased national income. Economic research revealed that prices of energy in the form of oil tripled in 2008 to a value of approximately 137 dollars up from 49 dollars in 2007 (Heyne, 2002). This prompted people to save more of their incomes so as to cater to the unpredictable prices of oil.
A sudden decrease in the value of dollars against other major currencies in the year 1987 contributed to recession (Hubbard, 2006). Investors usually show concern for the value of their investments. If a currency becomes stronger, then foreign investors will make fewer profits since the rates are higher. Appreciating dollar usually affects the prices of marketable securities like the bonds and other securities in the stock market owned by foreigners who have invested in the U.S. economy. It, therefore, means that the public and private projects cannot be financed by foreign direct investment as a source of capital.
These are unpredictable fluctuations of production and consumption activities over a period of time and can be recorded by change from rapid growth and development to stagnation and declining development (King, 2000). The indicators for growth and development are the increased gross domestic product checked for inflationary factors. Considering the unemployment rates in the world, then they act as evidence of business cycles. For this reason, I believe in the aspect of the business cycle.
Factors for expansion to occur
Expansion in the business cycle is marked by increased production and business activity until it reaches the maximum point. Some of the factors to note as contributing to expansion include investment and consumption expenditure (Burns, 2002). When investment is increased, it creates consumption. An example is the establishment of a manufacturing industry, which leads to the employment of youth. Salaries and wages earned will be spent on purchasing needs. In other words, an increase in demand creates a need for more industries to be established, thus shifting the economy to its peak level.
The diagram above illustrates how business activity progresses from low levels to high levels at stage five. It is clearly shown in the diagram that the main instruments being used include the stock market and commodity market. The values of these instruments are affected by interest rates of the Federal Reserve Bank, which is the main regulatory organ. To stimulate growth and more business activity, interest rates are lowered so that people borrow to reinvest in other areas of the economy (Burns, 2002). A downward trend in stage six is a probability of high-interest rates.
Opinion on President Obama’s stimulus package
President Barrack Obama captured the use of expansionary fiscal policy to resuscitate the economy from recession factors. The policy mainly involved increased spending on major areas of the economy. This type of financing is deficit financing since expenses are more than the national incomes. Education, employment, health, and social security are major beneficiaries in the budget. More industries will be streamlined and made more responsive to unemployment in the nation. A more progressive form of tax will be aimed at minimizing the gap between the poor and the rich.
The motive of the president’s budget proposal was ultimately for socioeconomic equity. As an expansionary measure, the US president proposed a tax relief for those earning fewer incomes and families with a minimum source of income (Lahart, 2009). This would subject them to more disposable income. By cutting down on taxes charged for small and medium enterprises, the administration would reduce unemployment while expanding on job creation (Lahart, 2009). The action of raising taxes on capital gains is a non-motivating factor to investors as it would reduce the amount spent on investment.
Effects on the economy
Expansionary fiscal policy by president Obama has both a negative and positive effect on the economy. The policy is meant to achieve social equality in the system by the use of a more progressive tax system. More funds allocated to various sectors in a bid to create jobs for the youth is also a positive step in development. The imposition of more taxes on the elite in the economy is a disincentive to those who have money and want to invest in a given area of the economy.
In conclusion, this research began by discussing recession as a reduction in employment of factors of production, thus a downward trend in growth. It further assessed factors that lead to a recession. Some of the factors include expenditure in pursuit of terrorists in Iraq and Afghanistan, appreciation of the value of dollar, financial crisis, and trade barriers in the form of sanctions and inflationary factors, which reduces the purchasing power of the population. The paper is also explicit on the business cycles and factors for its expansion. On a final address, the paper focused on Obama’s stimulus package and its effects on the economy.
Burns, A., & Mitchell, W. (2002). Measuring Business Cycles. New York: National Bureau of Economic Research.
Heyne, P., Boettke, J.,& Prychitko, D. (2002). The Economic Way of Thinking. (10th ed). New Jersey Prentice Hall.
Hubbard, R., & Anthony, O. (2006). Macroeconomics. Upper Saddle River: Prentice Hall publishers.
King, R., & Rebelo, S. (2000). “Resuscitating Real Business Cycles.” National Bureau of Economic Research. New York: National Bureau of Economic Research.
Krugman, P. (2005). The Return of Depression Economics and the Crisis of 2008. New York: Norton Company Limited.
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Lahart, J. (2009). Egg Cracks Differ In housing, Finance Shells. Wall Street Journal, 23, 1317- 1623.
Sullivan., A. & Steven, M. (2003). Economics: principles in action. New Jersey: Pearson Prentice Hall.